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Shares of Clorox increased around 2% in the pre-market session after the robust earnings results. In the past three months, shares of the company have increased 5.4% outperforming the industry’s 4.6% growth.

Q2 Highlights

Quarterly earnings from continuing operations of $1.46 per share increased around 4% year over year and beat the Zacks Consensus Estimate of $1.31. The bottom-line beat was mainly driven by increase in gross margin.

This Zacks Rank #4 (Sell) company posted net sales of $1,449 million, which declined nearly 2% year over year but surpassed the Zacks Consensus Estimate of $1,429 million. Further, sales remained flat on an organic basis. The soft top-line result was caused by unfavorable currency. Currency headwinds hurt sales by nearly 2 percentage points.

Driven by the recent price increases and cost savings, Clorox witnessed gross margin expansion of 40 bps to 44.1% in the fiscal second quarter. This marked the company’s fifth straight quarter of gross margin expansion. The rise in gross margin was driven by gains from cost savings and price increases. However, the gains were marred by higher trade promotion spending as well as increased manufacturing and logistics costs.

Segmental Discussion

Sales of the Cleaning segment remained flat at $501 million on decline in Laundry and unfavorable mix from strong growth in non-tracked channels. However, this was offset by growth in Professional Products and Home Care businesses.

The Household segment’s sales declined around 8% to $360 million mainly due to declines in Grilling, and Bags and Wraps businesses. Bags and Wraps sales were impacted by increased competitive activity as well as distribution losses. Further, the Grilling business delivered soft sales due to lower shipments in order to finish working through elevated retail inventory from the prior year. This was partially offset by sturdy consumption growth.

Sales at the Lifestyle segment rose 4% to $347 million. Results were aided by growth in the Natural Personal Care business, driven by innovation in Burt's Bees Lip Care and Face Care categories. Also, the Food and Water Filtration businesses contributed to segment sales growth.

At the International segment, sales decreased 2% to $241 million from the year-ago quarter. The segment sales were negatively impacted by adverse currency fluctuations to the tune of 8 percentage points mainly from Argentina, partly offset by gains of favorable price mix. Organic sales for the segment rose 6%.

Financials

Clorox ended the fiscal second quarter with cash and cash equivalents of $168 million, and long-term debt of $2,288 million. For the first six months of fiscal 2020, the company generated $498 million of net cash from continuing operations.

Fiscal 2020 Guidance

Clorox updated its outlook for fiscal 2020. It continues to project sales between low-single digits decline and up 1% in fiscal 2020. This indicates a slightly more favorable foreign exchange impact, offset by improved promotional spending.

However, it now expects organic sales growth of flat to 2%, compared 1-3% growth mentioned earlier. The current Zacks Consensus Estimate for fiscal 2020 sales is pegged at $6.17 billion.

Gross margin is now estimated to be slightly up driven by lower input costs. The company had earlier projected gross margin decline for fiscal 2020. Advertising and sales promotion spending is now anticipated to be more than 10% of sales. Selling and administrative expenses are still projected to be nearly 14% of sales. The company continues to envision effective tax rate of 22-23% for fiscal 2020.

Management now anticipates earnings per share of $6.10-$6.25 for fiscal 2020, compared with $6.05-$6.25 expected earlier. The current Zacks Consensus Estimate for fiscal 2020 earnings is pegged at $6.14.

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